SEC Can’t Have Rajaratam Wiretaps, Appeals Court Says

Sept. 29 (Bloomberg) -- A federal appeals court blocked a
demand by the Securities and Exchange Commission for wiretaps
from the insider-trading prosecution of Galleon Group co-founder
Raj Rajaratnam for use in its related civil suit.

U.S. District Judge Jed Rakoff, who is presiding over the
SEC’s civil enforcement case, was wrong to order Rajaratnam and
his co-defendant, Danielle Chiesi, to turn over the wiretaps, a
panel of the U.S. Court of Appeals for the Second Circuit in New
York ruled today. The defense received the recordings from
federal prosecutors in their criminal case.

The appeals court said Rakoff abused his discretion in
ordering Rajaratnam and Chiesi to turn over the wiretaps before
U.S. District Judge Richard J. Holwell, who is presiding over
the criminal case, has had a chance to rule on their legality.
The decision doesn’t bar the agency from obtaining the wiretaps
later in the case after Holwell rules.

“The district court clearly exceeded its discretion in
ordering disclosure of thousands of conversations involving
hundreds of parties, prior to any ruling on the legality of the
wiretaps and without limiting the disclosure to relevant
conversations,” the panel said in its opinion.

Rajaratnam, 53, and Chiesi, 44, are accused of illegally
using tips from company executives, hedge fund employees and
other insiders. They were charged in October 2009 as part of the
biggest insider-trading prosecution in history. The scheme
reaped $52 million in illegal profits, according to the SEC.

Wiretaps

According to Rajaratnam and Chiesi, the government
wiretapped conversations involving 18,150 communications
involving 550 people on 10 phones over the course of 16 months.

Prosecutors said they lack the legal authority to provide
the wiretaps directly to the SEC, according to the appeals
court.

“The more prudent course” may have been to postpone the
civil trial until after completion of the criminal trial, a
proposal that was agreed to by all the parties in the case, the
appeals court said.

The appeals court rejected an argument by Rajaratnam and
Chiesi that federal law bars the disclosure of wiretaps in civil
cases.

“We are pleased with the 2nd Circuit ruling today that the
Commission has a legitimate right to obtain relevant, legally
intercepted wiretap materials from defendants prior to their
disclosure in criminal proceedings,” John Nester, an SEC
spokesman, said in an e-mailed statement.

In August, Holwell granted Rajaratnam’s request for a
hearing in the criminal case on his claims that prosecutors
filed a misleading application to wiretap his conversations and
that they should be excluded from the criminal trial.

An evidentiary hearing on the wiretaps in the criminal case
is scheduled for Oct. 4 before Holwell in Manhattan.

The case is Securities and Exchange Commission v.
Rajaratnam, 10-CV-462, U.S. Court of Appeals for the Second
Circuit (Manhattan).